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AU 60 - COMPLETE QUESTIONS AND ANSWERS
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AU 60 - COMPLETE QUESTIONS AND ANSWERS
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AU 60 - COMPLETE QUESTIONS AND ANSWERSWhat are some examples of adverse selection and how can commercial underwriters
minimize the effects of it?
1.3 - Answers- 1. Business owners in areas prone to coastal storms purchase
windstorm coverage or increase their limits only before hurricane season—when they
expect severe losses.
2. A disproportionate percentage of business owners in an earthquake-prone zone
purchase earthquake insurance, compared with other business owners.
**Underwriters minimize the effects of adverse selection by carefully selecting
applicants to insure, charging appropriate premiums for the accepted loss exposures,
and monitoring applications and books of business for unusual patterns of policy growth
or loss and making any needed adjustments.
Book of Business
1.3 - Answers- A group of policies with a common characteristic, such as territory or
type of coverage, or all policies written by a particular insurer or agency.
Underwriting
1.3 - Answers- The process of selecting insureds, pricing coverage, determining
insurance policy terms and conditions, and then monitoring the underwriting decisions
made.
** Underwriters are an insurer's guard against adverse selection
Adverse Selection
1.3 - Answers- In general, the tendency for people with the greatest probability of loss
to be the ones most likely to purchase insurance.
Policyholders' Surplus
1.3 - Answers- Under statutory accounting principles (SAP), an insurer's total admitted
assets minus its total liabilities.
Catastrophe Model
1.4 and 1.14 - Answers- A type of computer program that estimates losses from future
potential catastrophic events
** These models help insurers determine whether they are charging appropriate
premiums for property exposures, have adequate surplus to handle claims from
property losses, and should purchase reinsurance.
Capacity
1.4 - Answers- The amount of business an insurer is able to write, usually based on a
comparison of the insurer's written premiums to its policyholders' surplus.
,Field/line underwriters vs. corporate underwriters
1.5 - Answers- Underwriters in the field evaluate individual insurance applications and
policy renewals and manage their own books of business. They are responsible for
much of the day-to-day operation of the insurer's underwriting process and are, in many
ways, the public face of the Underwriting Department.
Meanwhile, underwriters at the corporate level make large-scale decisions about
coverage, pricing, lines of business, and the overall risk selection process. They
typically work with underwriters in the field and other departments to manage the
insurance product.
Manuscript Policy (or manuscript endorsement)
1.8 - Answers- An insurance policy that is specifically drafted according to terms
negotiated between a specific insured (or group of insureds) and an insurer
Big Data
1.9 - Answers- Sets of data that are too large to be gathered and analyzed by
traditional methods.
Smart Product
1.9 - Answers- An innovative item that uses sensors; wireless sensor networks; and
data collection, transmission, and analysis to further enable the item to be faster, more
useful, or otherwise improved.
Internet of Things (IoT)
1.9 - Answers- A network of objects that transmit data to each other and to central hubs
through the internet.
What are some sources of big data used by commercial underwriters?
1.9 - Answers- 1. Smart products
2. Internet of Things
3. Telematics devices
4. Insurer's own loss exposure & pricing data
5. Regulators
6. Government orgs
7. Industry associations
8. Agents & brokers
9. Third-party databases
10. Social media
11. Internet
Artificial Intelligence (AI)
1.10 - Answers- Computer processing or output that simulates human reasoning or
knowledge
- powered by machine learning and deep learning tech
,** Helpful by automating simple tasks, assessing and recommending risk selection,
predicting and processing claims, and detecting fraud
Machine Learning
1.10 - Answers- Artificial intelligence in which computers continually teach themselves
to make better decisions based on previous results and new data
- computer uses algorithms to parse data, gain insights from that data, and present
informed decisions based on what the data reveals
- machine continuously analyzes new and existing data to improve its decision making
- computer must perform a specific calculation with the data it receives and then
improve the accuracy of its calculations over time.
Deep Learning
1.10 - Answers- Insights into data use and processing gained by combining artificial
intelligence and machine learning. It is based on algorithms derived from artificial neural
networks
- an advanced and far more capable subset of machine learning
- the most humanlike AI
- have the advantage of being able to work with incomplete data as well as train
themselves to perform new tasks
Data Mining
1.12 - Answers- The analysis of large amounts of data to find new relationships and
patterns that will assist in developing business solutions
** Commercial UNDs use this to ID patterns or specific characteristics in a large group
of data or book of biz
Governments impose regulations to...
1.14 - Answers- prevent insurer insolvency
Are insurers allowed to discriminate against different groups of customers?
1.15 - Answers- It IS legal for insurers to discriminate against different groups of
insureds or applicants
- In insurance, discrimination isn't necessarily a negative term; it's a descriptive term
that means to distinguish, differentiate, or categorize
- Fair discrimination is needed to ensure that each insured pays for the risk it presents
to the insurer.
Unfair Discrimination
1.15 - Answers- Applying different standards or methods of treatment to insureds who
have the same basic characteristics and loss potential, such as charging higher-than-
normal rates for an auto insurance applicant based solely on the applicant's race,
religion, or ethnic background
, To safeguard insurers' solvency and confirm that customers are treated equitably,
underwriting regulations may...
1.15 - Answers- dictate policy wording; constrain insurers' ability to accept, modify, or
decline loss exposures; limit allowable classifications of exposures; and restrict the
timing and conditions of coverage cancellations and nonrenewals.
Declination
1.15 - Answers- An insurer's refusal to provide coverage to an applicant who has made
a written request to the insurer or its producer, or a producer's refusal to forward such a
written request to an insurer.
Termination
1.15 - Answers- An insurer's cancellation of a policy during the policy term or
nonrenewal of coverage at the end of a policy term.
Notification Requirements
1.15 - Answers- Regulatory requirements relating to the timing and contents of an
insurer's notice to an insured of the declination, termination, and nonrenewal of
insurance coverage.
7 Examples of Underwriting-Related Unfair Trade Practices
1.16 - Answers- 1. Discriminating unfairly when selecting loss exposures
2. Misclassifying loss exposures
3. Canceling or nonrenewing policies contrary to statutes, rules, and policy provisions
4. Using UND rules or rates that are not on file with or approved by the ins depts in the
states that the insurer does biz
5. Failing to apply newly implemented underwriting and rating factors to renewals
6. Failing to use correct policy forms and ins rates
7. Failing to use state-specific rules
Market Conduct Examination
1.16-1.17 - Answers- An analysis of an insurer's practices in four operational areas:
sales and advertising, underwriting, ratemaking, and claims handling
- Market conduct examinations can be general or specific
- A general examination may be conducted if an insurer has not undergone a market
conduct examination for several years
- Details that are looked at:
1. general compliance
2. underwriting criteria
3. application of UND rules
4. cancellation and nonrenewal practices
Types of regulatory violations that an examination team looks for:
1.18 - Answers- - Unfair discrimination in risk selection
- Misclassification of risks
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